To some people, it can sound crazy to learn that many borrowers of home loans need advice on how to find and select the best loans available in the market.
Because how difficult can it be to identify one with the lowest interest rates when the best loans are put side-by-side to each other?
Well the truth is stranger than fiction.
Mortgages are not just about interest rates. It’s about a lot more than that. Just that interest rates are usually the one feature that gets the most attention.
The need for help also can be partly attributed to a home loan being a huge financial commitment. (quite possibly the biggest one most people will make in their lifetime)
So it is only prudent to seek the advice, knowledge, and wisdom of experts and people in the know.
This is the ultimate guide to mortgage shopping as we try to get as comprehensive as possible about the whole process.
1) Decide to be a shopper
This can seem like a ridiculous riddle to answer. Why else would you be reading this?
The truth is that many borrowers or would-be borrowers have emotional attachments to certain stuff.
They already have decision made up in their heads. And are just gathering information to justify their pre-made decisions… no matter how much they feel against it.
It could be that they have already decided to:
- Go with a friend or family member who is a loan officer
- Go to the bank which they have been using for years
- Go with a mortgage broker referred to them by their real estate agent
- Go with a loan package because it comes with a $500 shopping voucher
If you have already made a decision regarding who to loan from or which loan to sign up for, no matter how much research you make online or offline, it will unlikely change you decision.
Even if you’ve found that you have been fleeced, the odds are that you would still use your “friend” because it would be too awkward to walk away from him just before the final hurdle.
Anyway, he might have strategically dragged your loan application slowly along so that you have no time to maneuver before closing. Leaving you with no other options.
So the very first step toward fining the best housing loans you qualify for is to decide that you are a shopper and that your decision will not be influenced by social pressure or emotional blackmail.
Only then will you incorporate the proper mindset needed to navigate these tricky waters.
Otherwise, admit that you are already closed. Just go sign the documents already and stop wasting your time doing research.
If you have decided right now that you are going to be pro-active in seeking out the best mortgages, look no further than mortgage brokers.
They are the source most likely to do that job for you.
You don’t need to avoid direct lender completely. But they should remain as a second choice for backup.
2) Decide on the little features
Before even looking at the most critical feature of a mortgage, which are interest rates, spend some time exploring the various other features that come with them.
Some of which are the most important include:
Run the features listed above through your head and decide what are your preferences and what you would realistically like to have.
The reason you need to do this is so that you have a clearer picture of what you desire.
Failing to clearly identify what you want can lead to a lot of wasted time. You can even tempt a broker to promote the types of loans that are of no interest to you.
Just like how having a pre-approved home loan can help you narrow down your home search, knowing the specifics of what you want in the loan or the preferences you can accept can help you narrow down your mortgage search.
For example, it would just be wasting your own valuable time should you find a loan with low interest rates but come with points that are akin to daylight robbery.
3) Identify your property and application type
Have you ever walked into a store promising 80% off on merchandise only to find that the actual products you want in the store are still selling at regular prices?
This happens a lot in the lending industry as well.
If a lender is advertising a jaw-dropping loan that is unheard of, the actual chances of you getting your eager hands on it is slim to none.
This is because advertisements often use generic prices to attract the attention of prospects.
Only after walking in to inquire about the promoted loans will customers realize that those special prices are meant for others with specific profiles.
And since they are there, they might as well inquire about what they can qualify for too.
If you walk into the branch of a lender or broker and don’t give specific details about your property in question, you are most likely going to be met with generic prices as well.
This is part of the sales strategy of loan officers.
They get you to advance slowly towards the next stage of the application process and then reveal later that you qualify for a different set of mortgage terms instead of the one you saw in the adverts.
And then when your property type is clarified and rates quoted to you, it might turn out later that the previous quote was for borrower with a certain level of credit score.
With an upsell, the price rises again.
There are many varieties of how these events can play out.
In order to avoid being the victims of such business operating practices, borrowers need to know what type of niche they fall into.
You need to know specifically:
- What type of property you are buying or refinancing
- What type of loan application you are going for in terms of documentation requirements
- And if credit score is required, what is your credit score.
By knowing these information beforehand, a broker or lender will be more equipped to quote you correctly.
Furthermore, they would know that you have done your homework and will think twice before trying to pull a fast one on you.
4) Price selection
As mentioned previously, if choosing the best price for a mortgage is as easy as choosing the price of concert tickets, no borrower will ever need to complain about being conned… even though the broker or lender never attempted any such acts at all.
The good thing is that even though choosing the best prices of home loans are not as straight forward as we would like, it also not rocket science.
Fixed rate mortgages (FRM)
One tried and test method is to add up all upfront fees charged by the lender in dollar amount. Exclude all fees charged by third parties which you will deal with yourself later. Also exclude escrow charges and per diem interest as these are not real expenses of the taking up the loan.
Some of the cost items to include are:
- Origination fee
- Processing fee
- Broker fee
After tabulating the total number, express the amount as a percentage of the loan amount.
Do this with all the FRMs you are considering to generate a general over of them.
It should be clearer now which of these loans are more attractive.
But of course, you are not going to settle for any of these.
Go back to the broker and propose changes to the make up of the loan packages to see what you can get by adjusting the variables.
For example, if a loan comes with 7% interest and $5,000 in fees, ask what you can get if you want an interest rate of 6.5%. Or what you can get if you will only pay $2,500 in fees.
You might be shocked at the results you can get with this strategy.
Sometimes, from a shortlist of 5 different loans, 4 would have predictable adjustments, but an outlier emerge with much better terms.
This can be due to various reasons.
One of which could be the compensation that lender is offering the broker. Or that underage would not be as costly with a specific lender.
An easier way to do this, which is trending at the moment, is to request the price of all loans contained in the shortlist with zero settlement costs.
With this approach, it becomes almost like choosing vegetables at the supermarket.
All the borrower has to compare is the interest rate since the lender will be financing all the closing cost associated with taking up the loan.
Adjustable rate mortgage (ARM)
This can be very relevant especially if you know that you will be selling the house and moving out before the period of fixed rates expire.
However, for pure ARMs, because of the unpredictability of interest rate movements in the future, the variables to compare them has to be more qualitative.
For example, if two ARMs have the same interest rate over 10 years, the one with a lower limit on adjustment cap will be better than the one that has a higher cap. Or the one with the less volatile index rate will be a safer bet.
When choosing between indices, the general advice is to not forecast what they will be in the future. Focus on which is the lowest now.
5) Get the quotes
After sieving through the flurry of loan packages available, it is time to get the lenders offering them to officially quote for them.
Either request them from the lenders if you went to them direct or the mortgage brokers serving you.
Remember that oral quotes will seldom hold up when there are disputes over pricing. So you need to obtain this in black and white.
A proper mortgage quote should contain material information like:
- Lender fees
- Broker fees
- Current value of fully indexed rates
- Type of property
- Type of documentation requirements
- Points and rate lock
- Features that could affect interest rates
If you have skipped any of the steps up till now, don’t worry.
You can still obtain price quotes from lenders and brokers from a variety of sources.
- Walk-in to lender and/or broker branches
- Loan officers
- Mortgage rate aggregator websites
- Lender websites
- Broker websites
At this stage, be honest with answering every question the lender is asking.
You don’t want a situation where the quote is eventually deemed invalid due to inaccuracies in the key information you have provided.
Lenders can pull this rabbit out of the bag should they find that they can make a bigger profit by quoting you with new rates.
6) Choosing the lender
The choice of lender would be easy should a mortgage stick out like a sore thumb with an incredible killer deal on the table.
But what if the best two or three loans all have the same interest rate?
This is actually a common occurrence.
It is somewhat a measured or engineered situation that lenders create.
Not that they are colluding with each other. But because they refuse to undercut each other anymore or face making a loss on the deal.
Instead they go down to similar price levels and force the borrower to choose one of them based on brand recognition or service.
After all, banks spend millions of dollars on their market budget to enhance the goodwill and image of their brand to the masses.
Surely that must pull some weight with borrowers?
The thing is that all lenders essentially sell the same product which is money.
A lobbyist might call it funding or financing. But it is what it is.
And no dollar from one lender will be worth more than a dollar from another.
I can get it if a lender’s brand makes a borrower prefer one over another. But for me it is immaterial.
Service however, is something that consumers are known to be willing to pay for.
This is why people are willing to pay premium price for to use a pool in a spa rather than a public swimming pool.
But I’ve heard so much sales pitches from real estate agents and professionals how their high prices can be justified with their high service level, then deliver little added value, that I have grown immune to such service claims.
Service level does not become become good just because the provider claims it to be so.
To me this is just more mumbo jumbo and a weak attempt to convince customers to sign on the dotted line.
And with regards to service after the loan closes, most lenders outsource after sales servicing to third parties.
There is every chance that all the loans on your shortlist will end up with the same account servicing company.
There is one factor worth considering when choosing between lender who are offering the same rates.
And that is the lock.
Because even though a borrower might have obtained quotes from lenders, he is not yet out of the woods.
This is because lenders might have requirements that a borrower must meet in order to put a lock for rate protection on the price.
Assuming everything is the same between different loan options, the lender who is willing to commit to a lock would be more favorable to the borrower as it has demonstrated it’s credibility.
This leads us to the dilemma of whether to lock… or not.
This is something that you have to decide for yourself. Maybe through intuition or market vision.
When there is no lock mechanism in place, the borrower might exploit the advantage of decreasing interest rates between to time of application and closing. But that also exposes his risks to rising interest rates.
When a rate is locked, the borrower has effectively committed to the rate in question. At closing, the locked rate will be used.
The borrower can of course refuse to accept it and demand a reprice. This can cause a whole different set of problems.
The good part is the some lender have introduced such a thing as a float-down.
This is a lock that protects the borrower from rising rates. And should rates decrease before closing, the borrower has the option of taking the new lower rate.
So request for this if available.
With locks, lenders sometimes also quote better prices for shorter lock periods.
For example, a lender might have offered the original quote with a 60-day lock. But if the borrower is willing to accept a 30-day lock instead, there might be 0.5 point reduction.
When choosing between these options, keep your closing date in mind.
7) Keep a watch on lender fees
A borrower will now be at the final home stretch when he reaches this stage.
And if you have played video games, you will know that you will never get a clean run towards the finishing line at this phase.
While brokers will more or less commit to their quoted fees from the previous stages, the same cannot be said of lenders.
This is because mortgage brokers run their own operations and will seldom tolerate lenders who play dirty tricks as it can negatively affect their own business.
This makes brokers a borrowers first line of defense against any unethical lenders.
Should borrowers deal directly with lenders, do know that they have the free hand to adjust their fees citing any reason they can think of.
Just remember to keep a watchful eye on initial quoted fees and final fees.
Finally, try to have fun and enjoy the shopping process.
Being in a positive emotional state would keep you more alert and might even entice others to keep you happy with better deals.